Tuesday, September 27, 2011

“After College Finances: What Now?” plus 1 more

“After College Finances: What Now?” plus 1 more

Link to Financial Highway

After College Finances: What Now?

Posted: 27 Sep 2011 04:01 AM PDT


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It is a great time. You've finished your formal studies and the world is your oyster! The upside is you're free to do anything you want; Follow your dreams, find the right job etc. The downside is that you've probably got a ton of debt, from your student loans, credit card debt and have very little cash. We call it "Young, Fabulous and Broke".

Almost all of you will have serious questions about your finances. Do you pay off credit card debt first? Pay off student loans first or start a saving fund for retirement? All of these are valid questions so let's first start by looking at your current situation.

401k/RRSP Matching

Those who are currently working and have a 401k/RRSP plan that matches your contribution should match up to the maximum allowable. Yes, it means that you take home less money but it also means your employer gives you more money for your retirement! Think of it as free money for a little pain.

Pay Credit Card Debt

Those who are working but don't have a 401k or have one that isn't matching should tackle their credit card debt. It is the most expensive debt and causes the most financial pain for people. Reduce spending, work with your salary and set aside a good amount every month to settle your credit card debt as soon as possible. Also look at the rates of your credit card. Some cards are more expensive than others. The best cards are almost always those from credit unions.

Emergency Fund

Once all that is settled, you should look at building an emergency fund just in case anything bad happens and you need money immediately. The aim is to get enough money to finance your living costs up to 12 months. Living on your salary check month-to-month is a silly thing to unless you there's no other choice.

Long-Term Goals

When all of the above financial needs are met, you can start thinking about your medium to long-term financial goals. Think about contributing to a Roth IRA plan and taking care of your future. These are just a few suggestions that new graduates should consider about their finances.

Ryan Parker is a writer who specializes in personal finance and bad credit financing options. He is available at his loans site at CreditRelease.com

Avoid Overcontributing to Your TFSA

Posted: 27 Sep 2011 04:00 AM PDT


Despite a year-long campaign to clear up confusion surrounding how much Canadians can contribute to their tax-free savings accounts (TFSAs), it seems many of us are still getting it wrong. This year, the Canada Revenue Agency (CRA) sent well over 100,000 letters to account holders telling them they overcontributed in 2010 and will have to pay a penalty. [Also see: Tax Free Savings Account (TFSA) Ideas]

If you've received one of these letter, or are at all confused about TFSAs, read on.

How much can you contribute?
Every Canadian aged 18 or older can put up to $5,000 per year into their TFSA. If you don't use your $5,000 of contribution room in any given year, it can be carried forward for future years. For example, if you were 18 or older in 2009 (the year TFSAs were introduced), and you've never contributed to a TFSA, you can put up to $15,000 into your account this calendar year.

That sounds straightforward enough, and for most people, it is. For most, the confusion starts when they decide to withdraw money from their account. If you make a withdrawal from your TFSA, that withdrawal amount is added to your available contribution room as of January 1 of the following calendar year—not the current year.

Because this is still tripping up so many of us, let's look at an example. Let's say you're contribution room for 2011 is $5,000 (because you've been dutifully contributing the maximum amount since 2009), and you've so far contributed $4,500 this year. In August 2011, you decided to withdraw $1,500 from your account. Your contribution room for 2011 remains $5,000, which means you can contribute at most another $500 this year. If you use all of your contribution room for 2011, your contribution room for 2012 will be $6,500 ($5,000 plus the $1,500 you withdrew in August 2011).

What happens if you’ve overcontributed?
If you get a letter from the CRA telling you that you’ve overcontributed, you'll have to pay a penalty of 1% per month on the excess amount. The penalty stops accruing once you have either withdrawn the excess amount from your account or accumulated more contribution room, so you'll want to withdraw that excess amount as soon as possible.

If you get a letter from the CRA and you don't think you've overcontributed, ask yourself these two questions.

1. Do you have TFSAs at more than one financial institution? If you do, are you sure that the combined amount in these accounts is within your contribution limit? This is a simple mistake that many of us have made.

2. Did you transfer your TFSA from one bank to another? If you did, check that both banks handled your transaction as a qualifying transfer, not as a withdrawal and new contribution. After all, banks make mistakes too. If you held onto the money in a regular bank account or non-TFSA investment for any amount of time, that's not a qualifying transfer. You've withdrawn the money and made a new contribution. Check the rules carefully at the CRA website.

If you're still not sure how you've overcontributed, your best bet is to contact the CRA to find out what’s going on.
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